NEW YORK, July 30 (Reuters) - The expiration of special U.S.deposit insurance at the end of the year has spurred b anks tolobby Congress to extend the program out of fear that companieswill withdraw billions of dollars.

TAG primarily benefits businesses and local governments thatneed quick access to large amounts of cash for payroll and otherneeds.

About $1.3 trillion of TAG-insured deposits that do not payinterest sit at large and small U.S. banks.

The TAG program was created by bank regulators and the U.S.Treasury during the 2008 financial crisis to attract cash forbanks and reassure depositors that their money was safe. In2010, Congress extended the TAG program through the end of 2012.

Without another extension, businesses are likely to shifttheir deposits to prime money-market accounts and othershort-term alternatives.

"This program is the best deal around," said Robert Haas,senior treasury associate in charge of cash management andinvestments at the National Railroad Passenger Corp., the parentof Amtrak.

It addresses treasurers' two primary concerns: safety and areturn on cash that comes from discounts banks give on otherservices in lieu of interest, he said.

If the program disappears, he will look at other options,Haas added.

A LIFELINE FOR SMALL BANKS

While the 10 largest U.S. banks hold 70 percent of TAGdeposits, small banks have benefited by attracting deposits fromlocal borrowers to fund loans that previously went to biggerbanks, which are seen as safer. Community banks with under $10billion of assets hold about $200 billion of TAG deposits - orabout $23 million per bank.

"Extending TAG is our No. 1 priority this year," said CamdenFine, president of the Independent Community Bankers of America,who insists that business lending in distressed communitiesdepends on the program. "Ending it will have a crippling impacton any kind of full economic recovery."

The ICBA seeks a five-year extension of the program.

A bipartisan group of legislators have told constituents inthe community banking world that they support the banks, but anextension is by no means certain.

The U.S. government is trying to exit many of the emergencyfinancial programs set up during the crisis.

Time is not on the bankers' side on this issue. Only aboutthree weeks of legislative days are left to craft an extensionof the TAG insurance program before the presidential election.

Banking industry lobbyists said the best possibility is toattach a TAG extension to a bill that seems certain of passage.That bill has not yet been determined, they said.

Exacerbating the problem is that banks are feuding amongthemselves over the program.

Many large banks are concerned that small banks are winningdeposits by assuring customers their funds are completely safe.If these banks end up failing, big banks could have to pay moremoney into the FDIC insurance fund. Banks are not currentlycharged an additional assessment on TAG deposits, but that couldwell change.

When directors of the American Bankers Association, apowerful trade group representing large and small banks,convened earlier this month, it was a tossup as to whether theywould support a TAG extension, said people familiar with theirthoughts.

By the end of the meeting, they voted almost unanimously toseek a two-year extension.

"The tipping point was new uncertainty about the economy,"said James Chessen, the ABA's chief economist.

Bank executives have become spooked about a recent declinein customer loan demand due to burgeoning concerns about theeuro-zone crisis, the potential year-end budget-and-tax battleknown as "fiscal cliff" and new signs of a slowing U.S. economy.Extending TAG eliminates at least one element of year-enduncertainty for them, Chessen said.

WHO NEEDS IT?

Many analysts shrug their shoulders at the controversy.

Big banks don't need the cash. They have fixed the liquidityproblems that plagued them during the financial crisis andcannot invest or lend their excess deposits at a rate thatbenefits shareholders.

"Banks don't want this money because there is nothing theycan do with it," said Richard Bove, an analyst at RochdaleSecurities.

Bank of New York was so awash in deposits last summer thatit threatened to charge companies with more than $50 million indeposits to offset the fees the bank pays to the FDIC. The bankretreated from the plan but is now considering charging Europeanclients who are flooding it with eurodeposits, Chief FinancialOfficer Todd Gibbons told Reuters this month.